An Empirical Study On Incentive Effects And Entrenchment Effects Of Managerial Ownership

In industrialized economies, many companies are not owner-led but manager-led which causes the separation of ownership and control. The separation then brings about well known principal-agent problem. The principal-agent problem arises from different interests of the manager and the owner in combination with information asymmetries. As the manager can not be completely monitored by owners, he is expected to lead the company less efficient than the owner, as he maximizes his own utility and not necessarily the firm’s value.Managerial ownership is a widely-used method to relieve principal-agent problem. It focuses on reconciling the different interests of the manager and the owner. The convergence of interests may encourage the manager to behave more like an owner. This is incentive effects of managerial ownership. But at the same time, the manager may become entrenched, as ownership shares help secure the position and impair the restrictions. Entrenched manager is powerful enough to use his discretion in own interests rather than pursuing the owners’goals. This is entrenchment effects of managerial ownership.This paper is expected to achieve three goals. Firstly, it exams the existence of incentive effects and entrenchment effects respectively. Secondly, it further considers the combined effects which is also called phasal effects. Lastly, it helps to find a proper ownership shares ratio. Differing from most former papers that study incentive effects and entrenchment effects through firm performance, this paper considers the effects of managerial ownership in the context of R&D investments. Basing on theoretical analysis, we collect a sample of540Chinese list companies to conduct empirical test. We find that:(1) managers holding some shares invest more into R&D than managers holding no shares do. This proves the incentive effects.(2) managers holding some shares even invest more into R&D than controllers (holding50%shares or above) do. This attributes to entrenchment effects as over-investment is a behavior of entrenchment.(3) there is a strong non-linear relationship in shape of an inverse u between managerial ownership and R&D investment intensity.